Open Access Research Article
INFLATION AFFECTING THE REAL ESTATE MARKET: A COMPARATIVE ANALYSIS BETWEEN USA AND INDIA
Published Paper
Article Details
AUTHORED BY - MADHUMITA L & SUMUKH C
School of Law, Christ
(Deemed to be university)
ABSTRACT
Real Estate projects in India are regulated under the Real
Estate (Regulation and Development) Act, 2016 and hold an integral part in a
country’s economy. The rise in the increase of prices of goods and services in
an economy has a proportional effect on its real estate activities. Inflation
is known to be a boon to the real estate sector as the prices of the properties
rise considerably with the rise in price overall. This is known to be
disadvantageous to the homebuyers as they have to spend more out of their pockets for the same
property had there been no inflation in the economy. Therefore, the authors
have tried to find out the key issues related to such high prices leading to
lower purchasing power for the homebuyers in India and the US.
KEYWORDS: Economy, Homebuyers, Inflation, Proportional
effect, Purchasing power
INTRODUCTION:
Real estate has always
been known to be one of the most lucrative fields for investors in any economy.
With the rising demand for houses amongst the young generation, married
couples, newly employed, the prices of property is mostly high. Real estate
also offers ample amount of earning possibilities to developers, promoters, real
estate agents etc. It is a highly volatile market with constant fluctuations in
prices affecting both homebuyers and home developers to a considerable extent.
Here, inflation and deflation in the economy have an impact on the property
prices, rental accommodations, cost of living, cost of production/construction
of the project. Inflation is known to have a positive effect on the real estate
market with respect to home developers as they have the advantage of charging
high prices for their property or even charging high rents as the demand for
rental accommodation rises during such periods. It can be said that property
owners have an upper hand over homebuyers during inflation. Skyrocketing home
prices are taxing on the hardworking families as they are forced to spend more
and for the basic amenities like that of shelter. Pricey housing forces people
to get married early or have less children than planned or move out to cities
with affordable stay. Across the nation, local government agencies frequently
and proactively forbid homeowners from making the most use of their property.
When it comes to building on their land, let alone making repairs or
improvements, landowners frequently encounter unending red tape. Without
providing any compensation, these regulations lower the potential value of a
property. Local governments provide an informal, hard-to-enforce collective
property right, supported by state power, that enables homeowners to dictate to
their neighbors what they should and shouldn't do on their land, in place of
weakening individual property rights. The determining factor here is the
increased demand of the homebuyers for new property. Therefore, investing in
real estate sector is essentially a plus point for buyers[1].
CORRELATION
BETWEEN INFLATION AND REAL ESTATE:
Talking about how
inflation affects the real estate market, it is important to note down the
pointers which lead to the appreciation in prices. Real estate being a tangible
hard asset appreciates in value as the price rises along with retaining such
high price during uncertain times. Another correlation between inflation and
real estate is the fact that landlords tend to increase rental rates to keep
pace with the rising expenses thereby leading to higher rental income. Central
banks also increase their interest charges to control inflation thereby
increasing borrowing costs of individuals, borrowers and businessmen making it
difficult for them to finance real estate purchases as higher interest rates
deter potential buyers from investing in the sector. There are also instances
in which construction costs have severely risen because of increased prices of
materials and high labor cost again increasing property prices because of less
supply and higher demand for the same. Inflation in the financial market also
prompts investors to diversify their investment choices leaning more towards
the real estate sector thereby driving up the prices yet again. Inflation has
been known to slow down the housing market and deter qualified buyers from
entering the market as their affordability decreases[2].All
of these factors boil down to an investor’s sentiments which essentially means
that if investors feel that real estate is a good hedge against inflation, it
can drive up prices and demand for property.
Comparative Analysis of the effect of inflation between the
countries of USA and India:
INDIA:
India in the field of Real
estate is recently developed compared to other countries where the centralized
act Real Estate (Regulation and Development) Act, 2016 was brought with the
main aim to protect the “home buyers”[3]from
fraud, misrepresentation and other illegal activities, the act came into force
to fasten the process and to seek justice to the homebuyers. This is formulated
in every state that it should have its own RERA as it is considered as Fast
Track Mechanism. The cost of living is changing every year, according to the
latest statistics, India’s
retail inflation eased to a three-month low of 5.02% in September 2023[4].where it has been a
positive aspect for real estate owners as they get higher yields on their
assets, the value of the land mostly does not depreciate so the potential buyer
need not worry as the period for which the infantry period lasts is not
predictable. Inflation is connected with various factors simultaneously in
which a number of changes like
higher mortgage rates, higher home prices, devaluation of long-term debt,
increase in the cost of construction and more price of property. Property
prices shoot up and this is due to the complementary effect when the
construction material rises then automatically there is higher price quotation
which results in increasing the cost of developing properties and this is
because of the decrease in the value of currency which is also known as
devaluation effect. So, in such a case the lender has no other choice but to
raise the price. Secondly, increase in rental prices is primarily due to an
increase in rental property demand brought on by the greater cost of borrowing
to finance real estate purchases.
In a case Legal Heirs and Representative of Deceased Ahmad
Mohammad v State of Gujarat where the Gujarat High court, where the award was
passed in the year 1991, it was tested that there is parcel of deferral and for
this situation the court has dissected that the land securing needs to be
postponed and as such a lot of progress in the field of RERA has taken place.
It has been arrived at a cap cost of land have soar past creative mind of the
big fan of expansion in the land. The facts confirm that no one would have
longed for the costs which the land brought in 2013 when the current land
obtaining procedures occurred. This Court had no faltering in putting on record
that however at that soar costs of the land, the candidates could not have
possibly taken inconvenience to arrive at this Court and challenge land
procurement procedures wherein the land proprietors agreed for giving their
properties to the public power in order to empower the public position to
design improvement around the city of Surat and the Court won't be off-base
assuming it is likewise placed on record that the land proprietors probably had
some advantage out of the said modern turn of events and in the recent case Desh Raj v. Rohtash Singh,
(2023) 3 SCC 714[5] were the court referred this case of
Saradamani Kandappan v. S. Rajalakshmi, (2011) 12 SCC 18 the growth of market
value of the immovable properties was stable in nature analyzing the price
shifts in last quarter of twentieth century has been galloping inflation and
price value of immovable properties has
raised steeply with a huge distinction from lakhs to crores[6].
Across many countries in the couple of years back during the pandemic period
the homebuyers who invested fall in the pit of loan which could not been paid
and construction workers demand increased, so automatically the wage of the
workers increased and reason being migrant workers moved towards their own
countries. According to data, it is said that Average house prices were forecast to rise 6%
next year and in 2024 this shows that the real estate sector is a growing
platform for overall infrastructure of the country.
In India, the real estate sector faces the core issue for
inflation which is due to rapid urbanization ,according to a UN report where it
said that there will be 675 million population growth in 2035, and it is more
and less irreversible to say that there is “supply and demand concept” linked
with the real estate market where the
supply is restricted by the government schemes and this is called ‘license raj permit system’ and this results
in higher market price compared to
fundamental values and leads to bidding wars where two prospective buyers
compete for ownership. In 2021,a case dealt with seller’s market and home
prices were at peak and in 2022 when the demand dipped , it lead to spike
making home buying more expensive, due to fluctuation of continuous supply and
demand .However, there was a remarkable revival In the April–June quarter of
2023, compared to the same quarter the year before, sales in India's eight key
housing markets increased by 8%, while the supply of new homes increased by 11%
year over year, according to Prop Tiger’s Real Insight Residential report[7]and
affordability of owning a house has become quite high in price and interest
rate therefore the developers are targeting the higher income segments in the
upcoming launches. Cities like Pune and Hyderabad have seen a speedy commercial
growth, the change in the RBI regulations has made a change where Non-Banking
financial corporations (NBFCs) are forbidden to take up an initial investment
in the real estate sector, which curbs the rural development indirectly by not
giving the loans, the core reason is the capital requirement, and RBI is the
regulatory financial authority where it initiates to maintain the inflation and
the repo rate policy it is steady at 6.5% that leads to increase in EMI’s, and
this will hike the rate of interest while taking a loan, including auto loan
and this serves as a negative impact for the homebuyers as it would lessen the
capacity to buy their dream houses. Therefore, it is a two-fold impact where while it makes home loans dearer for retail borrowers, it
makes loans costly for real estate developers too, increasing their finance
costs and affecting their profitability margins. To protect their margins, they
will have to increase home prices[8].
The Indian Real Estate market due to inflation has
led to demand for renting of houses as they don’t get credit easily during the
inflationary period With housing rentals and related expenses nearing
three-year highs and accounting for 10.07% of India's consumer price inflation
basket[9], the
central bank, which faced rising food prices for the most of last year, is
facing new concerns.in the top seven cities, the rentals rose from 20 -
25% to 30% during the pre-pandemic
period, and this is due to the people were working in a hybrid mode and a new
era of “Work from Home'' where the home buyers wanted affordable facilities,
which led to the situation of increasing rent prices. According to a number of
forecasts, the Indian real estate market is expected to increase at a compound
annual growth rate of 9.2% between 2023 and 2028[10].
Veteran members of the industry predict that 2023 will be a historic year for
this sector. The Indian real estate market was valued at USD 200 billion in
2021. The sector is expected to increase by USD 1 trillion by 2030.
Furthermore, the real estate industry is anticipated to account for 13% of the
nation's GDP by 2025. The reason for the inflation growth is due to the
increase in the expensive supplies and raw materials, which indirectly makes
the landlord increase the rental prices. There is a reliable price hedge, so
they have high-cost mortgage rates, which leads to lower purchasing power, on
the other hand, there is a negative impact on home buyers as it has a dampening
effect dividing homebuyers into three categories. Some categories are provided below:
- Affordable Home Segments- It mainly has low-income
class homebuyers and directly has EMI payments whose impact is quite high,
and thus, homebuyers alter their home purchase decision and get smaller
homes.
- Middle Home Segments- It is with regard to
middle-income families who are capable of handling the interest rates, and
their aim is to get their “dream homes” or“forever homes” with preferences
for locations, adjust restrains
where they move towards
adjustment at the cost of borrowings.
- Luxury Home Segments- It refers to high-income
individuals who have stronger financial stability and have priority in
what type of home to buy over the cost of borrowings. [11]
The government has
initiated the “Pradhan Mantri Awas Yojana”, which is brought into the
housing sector whose main aim is to provide affordable housing to lower and
middle-income groups and it is under the “Public Private Partnership” where it
is for the economically weaker sections along with improvement mechanism for
slum areas whilst providing monetary
benefits for construction or enhancement of the house, and it is also a credit
linked subsidiary scheme with respect to
sanctioned necessary carpet area and this scheme was mainly focused against the inflated real
estate sector[12] . This
scheme, however, has benefitted Delhi in the past as over three crore houses
have been constructed so far and handed over keys to 75,000 homebuyers in 75
districts in Uttar Pradesh along with 19,000 houses been built under the
programme to beneficiaries in Gujarat[13]and
in recent budget where the allocation
of Rs 79,000 crore for the Pradhan Mantri Awas Yojana (PMAY), which increased
it by 66%[14], The
concept of “Sustainability” focusing on green growth in upcoming housing
sector.
Real estate is a booming industry where the
investment can beat inflation in the upcoming years as the land value usually
bends towards appreciation. Therefore, the area which has a younger generation
as residents will see a gradual increment in rental income. Land, just like
gold is a tangible asset which acts as a security for investors and this
investment provides tax benefits as the return value is twice when the property
is put for resale.
USA:
Investors have always been
pessimistic about the real estate market in the USA as it has been a profitable
investment for them so far. Currently the U.S residential real estate market
stands at USD 2.53 trillion and is expected to reach USD 2.80 trillion by the
year 2028 making it an all-time high.Covid-19
seemed to have hit the real estate market drastically, and the market
seems to be in the recovery phase as the sales in property bounced back after
the pandemic[15]
.Owing to the low interest rates in the pandemic, the number of home sales
increased sharply in the second half of 2020 and has stayed higher since. In
addition, more than 142,406 housing units—of which more than 89% were occupied
by owners and renters—were available to satisfy consumer demand in the fourth
quarter of 2021. Furthermore, middle-aged and older residents of the nation
generate the majority of sales in the sector. For example, in the first four
quarters of 2021, over 70% of the nation's homeownership rates were held by
individuals between the ages of 45 and 65. One of the worst financial crises
the world has ever experienced began in 2007. The American real estate market
was the source of this crisis. Government initiatives led to a constructed boom
that quickly turned into a manufactured crisis. This is due to the fact that
President Alan Greenspan was forced to increase interest rates in the economy
once more out of concern for inflation. The subprime mortgage crisis was an
unprecedented event brought on by this spike in interest rates. Mortgage
payments increased each month as a result of higher interest rates. Many
homeowners were unable to pay their rising mortgage. The homes had to be
foreclosed upon as a result. Because of the situation of excess supply brought
about by the houses' diminishing value, prices were falling even more. Almost
all markets in the world were hit but the worst hit was the American Real
Estate Sector. Following the 2008 recession, the US real estate market has started
recovering. But the recovery has been sluggish. The real estate market is
currently experiencing a gradual rise in place of the sharp declines that it
once saw. Prior to September 2021, the US real estate market experienced a
period of rising home prices. The years preceding September 2021 saw
historically low mortgage rates, which boosted demand for real estate. Although
rental prices varied by location, they increased in many cities. Therefore, the
rent prices drove up drastically around 2021-22[16].Real
estate investment trust is a term attributed to a trust dealing with investors
planning on diversifying their investment portfolios by investing in this
sector. REITs are known as a way to hedge against the high rates of Inflation,
The unfavorable interest rates did quite the opposite. This basically resulted
in the fall in demand for properties and losses to the property owners
altogether. However, the effects on prices depend the type of REITs which
essentially means that the prices of industrial units having low demands have
high prices whereas the apartment rents and other housing properties are placed
at a low value. According to recent reports, it is held that housing prices
have seen a surge in the current US economy.Therefore,it is essential to
implement certain schemes or policies to tackle the problem of high priced
properties such as restoring property rights to buyers, encouraging down
payments to pay off for the property, streamlining the local authorities or
government, simplifying building and design rules for property owners, allowing
sandbox system for housing innovations, permit better promotional techniques
for promotion of the real estate projects thereby elevating the demand for
newer projects and rental accommodation by homebuyers[17].
Thus, allowing for such schemes provides better opportunities to both the
property owners as well as homebuyers resulting in the expansion and growth of
the entire real estate sector of the country.
CONCLUSION:
Real estate sector is
showing accelerated development which is crucial for the growth of the
country’s economy. India’s real estate sector is expected to grow to $5.8
trillion by 2047, accounting for 15.5 percent of GDP from the current 7.3 per
cent, according to a joint report by Knight Frank and the National Real Estate
Development Council (NAREDCO)[18] . The real estate
sector currently accounts for about 16.7% of the US GDP. Real
Estate (Regulation and Development) Act, 2016 which was enacted a few years ago
whose main aim is to protect the
homebuyers who put their hard-earned
money into having a dream house of their own, but unfortunately the reality is
biased where the particular community of property owners based on their own
varied dimensions get more privileges. Therefore, it is a need to include a
“Non-Discrimination Clause” under the RERA ACT, 2016.It is also required to
beat another con which is black money involvement in the sector, especially in
the housing sector. Inflation which is somewhat unprecedented occurs when the
market rates fall as it creates a bottom line growth and Peter Bernstein has rightly quoted that “when
inflation is low, you feel that you know more about the future, and are much
more willing to take risk” so precautions must be taken to reduce the risk in
the industry like proper planning,
information of budget allotment and understanding the investment process whilst
allocating proper monetary value to the land along with the capabilities to return back the home loans fixed by the
bank in the right time as the Real estate sector is a circulating form of
business with the involvement of government, intermediaries, investors and
homebuyers whose cooperation with each other is what sets the market booming or
moving ahead.
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inflation – Should you invest in real estate,in Voices, Economy, India, TOI,June 9, 2022, 6:59
PMIST,https://timesofindia.indiatimes.com/blogs/voices/rising-inflation-should-you-invest-in-real-estate/
[2] JOSEPH NGUYEN,Is
There a Correlation Between Inflation and Home Prices?, May 31,
2022,https://www.investopedia.com/ask/answers/correlation-inflation-houses.asp
[3] Real Estate (Regulation and Development)
Act, 2016, Parliament of India, 2016.
[4]Dipen
Pradhan, Inflation Rate In
India, October 2023, October 17
2023,Forbes.com,https://www.forbes.com/advisor/in/personal-finance/inflation-rate-in-india/
[5] Desh Raj v. Rohtash Singh,
(2023) 3 SCC 714
[6] Saradamani Kandappan v. S.
Rajalakshmi, (2011) 12 SCC 18
[7] Faizan Haidar, Residential sale grows by 8% YoY during April-June
quarter,ET Bureau, Jun 28, 2023, 09:40 AM
IST,https://economictimes.indiatimes.com/industry/services/property-/-cstruction/residential-sale-grows-by-8-yoy-during-april-june-quarter/articleshow/101326142.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
[8] JANAKI KRISHNAN
https://www.thehindubusinessline.com/profile/author/Janaki-Krishnan-18390/20
Oct 2023
[9] Reuters,17 Jan 2023, 01:10 PM IST
https://www.livemint.com/economy/indias-new-inflation-threat-rising-home-rent-11673940911056.html
[10] Deccan Chronicle,Why the Indian real estate market is anticipated to
grow with a CAGR of 9% by 2028,June 27,
2023,https://www.deccanchronicle.com/business/in-other-news/270623/why-the-indian-real-estate-market-is-anticipated-to-grow-with-a-cagr-o.html
[11] Akash Pharande, Managing Director,11 Aug, 2023
https://www.constructionweekonline.in/people/impact-of-high-interest-rates-on-home-buyers-across-segments
[12]https://www.bajajfinserv.in/home-loan-pradhan-mantri-awas-yojana
[13]May12,2023,https://realty.economictimes.indiatimes.com/news/residential/over-three-crore-houses-built-under-pradhan-mantri-awas-yojana/100173828
[14] Ashwinder R Singh, Budget 2023-24: What’s in store for Real
Estate sector, February 16,
2023, 4:02 PM IST,
[15] Y Chart
https://ycharts.com/indicators/us_inflation_rate#:~:text=US%20Inflation%20Rate%20(I%3AUSIR)&text=US%20Inflation%20Rate%20is%20at,in%20price%20over%20a%20year
[16]Ari Rastegar,How
Rising Interest Rates And Inflation Impact Real Estate Investments,forbes.com,Feb 24,
2022,https://www.forbes.com/sites/forbesbusinesscouncil/2022/02/24/how-rising-interest-rates-and-inflation-impact-real-estate-investments/?sh=187249c9601f
[17]Brad
Cartier, The effect of inflation on real estate investors, stessa .com
https://www.stessa.com/blog/inflation-and-real-estate/
[18]Sauravhttps://www.livemint.com/industry/indias-real-estate-sector-likely-to-expand-to-5-8-trillion-by-2047-report-11693042659703.html
Article Information
INFLATION AFFECTING THE REAL ESTATE MARKET: A COMPARATIVE ANALYSIS BETWEEN USA AND INDIA
Authors: MADHUMITA L, SUMUKH C
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/04/22
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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